Dispatches from the space race

Are Morgan Stanley right about house prices?

The latest market prediction comes from Morgan Stanley and forecasts a drop of 10% in house prices by the end of 2012.

Why? Well, they’ve looked at the balance of positives and negatives and concluded that the bear case will see prices crash by 17% while the bull scenario will see them rise by 10%.

On the bear side of the scale they list weak demand as key – this being held back by the squeeze on incomes, higher rates and subdued lending.

On the bull side they list limited supply and a lack of new homes being built.

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Their conclusion: “Demand looks set to be relatively unsupportive for prices over the next year and a half or so given our expectation for weak real household disposable income and rising mortgage rates … We don’t expect any significant further increase in availability of higher loan-to-value mortgages and expect only modest improvements in credit availability more broadly.”

Are they right? Well, it’s hard to disagree with their argument incomes and lending, both of which look likely to remain subdued. This will hit the mainstream mortgage dependent sector hardest and will indeed put pressure on prices.

As for rates, well if the economy is struggling, as they suggest, then it would be a surprise if they rose very far.

The situation certainly doesn’t look rosy, and price falls do seem likely, but expect wide variation: as Savills have recently argued, and as the most recent Land Registry report demonstrates, the equity rich, cash rich tiers of the market have remained resilient and look capable of continuing their upward trajectory. Elsewhere the market is more subdued and prices are falling.